When the dust settles on a year that included a ceasefire in the brutal war in Gaza, persistent but ultimately fruitless efforts to end the war in Ukraine, and the ramp up to a potential war in Venezuela, the biggest US national security story of 2025 may turn out to be one in which not a single shot was fired: This was the year that the US tried to declare economic war on China, and China fought back.
Early this year, in its final weeks in office, the Biden administration released its most sweeping rules yet governing the international trade of the semiconductor chips used to develop artificial intelligence models. Though these rules governed chip access for every country on earth, their primary aim was keeping the highest-end chips out of China.
This was in keeping with the concern of many US officials in both parties that the US risks falling behind China in the race to develop advanced AI, and that this race would be key to the balance of power in the 21st century.
The importance of US-China competition was an area of agreement between the first Trump and Biden administrations and there was every reason to believe the aggressive posture would carry over when President Donald Trump retook the Oval Office. Indeed, in its first month in office, the Trump administration slapped a 10 percent tariffon China for its alleged failure to combat the trade in fentanyl — those tariffs were later doubled. By April, the tariff rate was up to 145 percent, with Trump citing a “national emergency” caused by unfair Chinese trading practices. Treasury Secretary Scott Bessent has described these tariffs as effectively an “embargo.”
At the end of the 2025, things are in a very different place. The US dropped its steepest tariffs after just a few weeks, despite no major concessions from the Chinese side, and were dropped down to 20 percent after Trump held what he called a “12 out of 10” meeting with Chinese leader Xi Jinping in late October. In December, Trump scrapped much of the effort to restrict China’s access to chips by approving sales of Nvidia’s advanced H200 chips in the country, despite the objections of GOP hawks on Capitol Hill. “President Xi responded very positively!” announced the president once thought of by many as a dangerously aggressive China hawk.
The events of this year could end up being viewed as the moment of a fundamental shift in the power balance between the two countries, and one that could have ramifications in conflicts to come.
“It’s been a landmark year in the US-China relationship,” said Eddie Fishman, a former State Department sanctions official who now teaches at Columbia University. Fishman suggested that the events of recent months have “fundamentally changed the balance of power. It’s made the US much more gunshy about taking aggressive steps against China.”
The 2025 tipping point
US officials’ optimism about their ability to play hardball with Beijing wasn’t entirely unfounded. The US has long been adept at weaponizing what Fishman calls “chokepoints” in the global economy to put pressure on adversaries. The use of the dollar in international financial transactions is one example; the fact that the most advanced semiconductor chips are designed almost exclusively by US companies and produced almost exclusively by US allies is another.
Trump’s 145 percent tariff was a blunter instrument. But in that case, US consumers were the weapon. The idea promoted by the administration was that China’s economic model, which heavily depends on exports, could not survive without selling goods to the US.
In the long run, that may be true, but in the short run, the US blinked first. The 145 percent tariffs had caused the stock market to fall and raised fears of a recession. Bessent described the policy as not sustainable.
China’s manufacturing sector had indeed taken a hit, but it was still able to negotiate tariffs down to previous levels without major concessions on any of the policies that Trump had described as “ripping off” the United States. (This is in contrast to the European Union, which agreed to a trade deal that was very favorable to the US, under pressure from Trump’s tariffs.)
China’s authoritarian political system may simply have the ability to sustain the economic impact of a trade war longer than a poll-watching US administration. Xi certainly framed it this way, saying, “For over 70 years, China’s development has relied on self-reliance and hard work…and it is not afraid of any unjust suppression.”
But China wasn’t just taking the US’s punches — it was punching back. It did this by imposing 125 percent tariffs of its own, and halted purchases of American soybeans, but more importantly, it began weaponizing a chokepoint of its own. In April, China announced it was suspending the export of a range of rare earth metals and magnets — essential materials for US automobile, electronics, and defense manufacturers — around 90 percent of which are produced in China.
This set off panic among industry leaders when it became clear they only had weeks of stock of some of these materials left, and according to the Washington Post, “provoked deep consternation at high levels of the administration,” leading to Trump’s softened tone against Beijing.
The rare earth restrictions were a “holy shit” moment, Sen. Mark Warner (D-VA) told reporters during a recent reporters’ roundtable hosted by George Washington University.
Warner believes the administration’s realization of the “enormous reliance we have on China in terms of critical minerals” contributed directly to the decision to lift restrictions on chip exports. He also believes it’s a problem we should have seen coming.
“That is not a Trump administration-only mistake,” Warner said, later adding, “This has been a 15-year problem.”
There’s a striking contrast between this response in Washington and the export controls on chips, which did not prompt any major policy changes in Beijing and have likely slowed China’s AI progress but haven’t prevented it from introducing new models this year.
China has used economic coercion against other countries before, often more informally than this. Norway’s salmon exports to China dropped precipitously after imprisoned dissident Liu Xiaobo was awarded the Nobel Peace Prize in 2013, for instance. China has also played the rare earths card before: it briefly suspended exports to Japan in 2010 during a flare-up of a long-running conflict over disputed islands in the East China Sea.
But its actions this year were different both in scale and how systematic they were. Notably, China appears to have been taking notes on how its rivals used economic chokepoints in recent years.
“China absolutely uses foreign policies as a template for its own,” said Cory Combs, head of supply chain research at the research firm Trivium China. “Its export controls very closely map US, and to some extent, EU export controls.”
A notable example is its “unreliable entities” list of foreign companies and organizations restricted from doing business with China because they had “made malicious remarks about China, and assisted foreign governments in suppressing Chinese companies,” which is modeled fairly explicitly on the US Commerce Department’s “entity list.” A new licensing regime announced in October restricting the export of equipment to foreign producers that make their own rare earths products appears modeled on the policies the US has used to prevent companies that use US equipment from selling microchips to China.
Analysts believe China began a much more concerted effort to build the tools and legal frameworks to counter what it sees as US economic coercion during the first Trump administration, when the US began targeting Chinese tech firms like Huawei and ZTE with export controls.
This was the year Beijing got the opportunity to put its new weapons to the test.
The future of trade wars
China agreed to pause its rare earths restrictions for a year after the Trump-Xi meeting in October (and resumed buying soybeans) but hasn’t scrapped them entirely, and they could always be tightened again.
“The cat is out of the bag,” says Fishman. “This is going to be part of China’s strategy from here forward.”
This has implications beyond US-China trade policy. It’s not hard to imagine a scenario where China, peeved by US weapons sales to Taiwan, a future US president meeting with the Dalai Lama, or future chip restrictions, again turns to its rare earths weapon.
Amid the recent China-friendly shift in his rhetoric, Trump has taken to referring to the two countries as the “G2,” a formulation that effectively puts China on an equal geopolitical footing to the US and also deeply irritates US allies like India.
Other countries beyond the “G2” are likely to have taken note of the dynamics this year.
“Do we really expect other countries to really stand up against China now?” said Yun Sun, director of the China program at the Stimson Center. “It sends a message to the rest of the world that everyone needs to be more careful about how to deal with China.”
The Trump administration is looking for ways to blunt China’s economic weapons. One obvious way to do this would be to reduce reliance on Chinese rare earths. Despite their name, these metals aren’t actually all that rare, but they’re difficult to mine, environmentally polluting, and come with low profit margins. Private investment in mining them is unlikely without the kind of generous incentives the Chinese government provides. The US is now responding after this year’s wakeup call: The Pentagon has taken an ownership share in the only company currently mining rare earths in the US, and the Trump administration has inked rare earths deals with Australia and Saudi Arabia.
But some experts believe it may take more than a decade before China-free supply chains can be developed. Despite Japan’s large-scale effort to diversify away from Chinese rare earth supplies after the 2010 crisis, it still buys about 60 percent of them from China. On the other side, China is working to reduce its reliance on the US and its allies for chips as well, but those efforts are also likely to take years.
The generous reading of both trends, from a US perspective, is that the two countries are caught in a kind of economic mutual assured destruction that could keep tensions from spiraling out of control. The less generous reading is that this year showed that when it comes to economic warfare, China has a higher tolerance for escalation than the US. And it may escalate again soon.
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